Posted by: Josh Lehner | July 21, 2017

Eugene in Perspective (Graph of the Week)

We’re down in Eugene for some meetings with local businesses as part of our annual get-out-of-Salem trip with the Governor’s Council of Economic Advisors. Once per year our group visits a city around the state to learn more about the local economy and enjoy different parts of our beautiful state. I will follow up soon with some of the information we learn but for now wanted to post a few quick thoughts.

Let’s take a quick look at the Eugene MSA (Lane County) and its economic growth over the past 35 years. The region has been through a lot and yet has proved resilient to massive shifts. The Changing of the Guard has had a huge impact here locally. And yet, Eugene overall has kept pace not only with other metros that have a similarly built economy but also with all metros around the country.

What I did earlier this year for a few Eugene-specific outlook talks was look at the detailed industrial structure of all US metro areas from the 1980 Census, using the current MSA definitions as best I could. Then I found those that had the greatest similarity to Eugene’s industrial structure back then. You can see the list on the left below. I then tracked employment across all the metros in the past 35 years. Turns out Eugene is pretty typical or essentially the median metro among this group. I don’t show the actual median among the group because the chart gets messy with overlapping lines and the US total metro makes more intuitive sense to me at least. And the simple fact the group median and US total metro are nearly identical.

Here you can see the massive impact of the early 1980s recession on Eugene — and the rest of Oregon too of course. However, following the timber industry restructuring of the 80s, strong growth returned and Eugene caught back up by the late 1990s and was above the majority of other metros by the mid-2000s.

In recent years Eugene has once again undergone a massive restructuring, not totally unlike the early 1980s. The region lost 40% or so of its manufacturing jobs and those are mostly permanent losses (RV industry and the tech chip plant chief among them). However all other sectors have regained their employment peak and the region is growing. 2016 was another good year of growth, closing the gap relative to the typical metro. And more importantly household income are rising again. Eugene is proving resilient once again.

Finally, among the peer metros, it is true that both Boise and Houston have pulled away from the pack. This means they skew the blue portion of the chart upward. However Eugene outperforms most of the rest. 

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Posted in Employment

Posted by: Josh Lehner | July 12, 2017

Oregon Household Debt: Mostly Tame

In early 2017, total household debt in the U.S. reached an all-time high according to the Federal Reserve Bank of New York’s Household Debt and Credit Report. There has been some handwringing over this given huge debt loads last decade were one reason for the financial crisis and its severity. However one cannot just look at the total debt number without context. One must look at both debt and income, or liabilities and assets to make sense of the situation. What follows is an update on household debt here in Oregon.

First, while total outstanding debt in Oregon is also at historic highs in dollar terms, as a share of personal income it remains relatively tame. In fact, Oregon households are now leveraged the least they have been since the late 1990s and early 2000s. Now, it can be hard to say what the proper, or right amount of debt is. The key is using it property when needed and ensuring the ability to pay it off eventually. The good news is that national data continues to show servicing these debts takes a historically small share of our personal income. In other words, overall debt loads are in-line with incomes and we can make the payments.

Now, keep in mind that these are aggregate statistics. They add up all the debt or all the income in the Oregon economy. Individual households can obviously vary considerably and there are no doubt numerous households with too much debt and/or not enough income to pay for it.

Even as Oregon’s relative patterns mirror the nation, our levels of household debt are larger than those seen in the typical state. This is true for our western neighbors as well. Specifically, California ranks 6th highest in terms of household debt to income, Oregon ranks 7th, Washington ranks 9th, and Idaho ranks 13th.

The primary reason for these patterns are housing costs as mortgage debt is the largest component of total household debt. With higher home prices along the Left Coast, it takes larger mortgages to buy a home. However, even here we are seeing relatively tame levels of mortgage debt, at least when compared with income. Yes, home prices continue to go up, up, up but we are now seeing corresponding increases in household incomes. Furthermore there has been strong growth in the number of higher-income households as the economy continues to improve, although such gains are not due to rich migrants.

It must be noted that some of the mortgage deleveraging following the crash was for a bad reason: foreclosures. When one loses her home, she also loses the debt. That said, even in recent years Oregonians haven’t been leveraging back up on mortgage debt. Thankfully, that (likely) means any potential housing issues in the future won’t have the same economy-wide fallout as last time.

The next chart looks at other types of households debts beyond mortgages. Local trends, again, follow the same patterns seen across the country. That said, Oregon’s auto loan and credit card debts are lower than the national average or those seen in the typical state. Combined, Oregon ranks 31st highest among all states for auto and credit card debts.

There has been some discussion about subprime auto loans and potential issues there. The NY Fed had an article on that late last year. The bottom line, as Deutsche Bank economist Torsten Slok said, these loans may be a worry for those holding the debt, but it is not a problem for the macro economy. One reason is outstanding subprime auto loans are considerably smaller than the subprime mortgage market last decade, and the financial system has less leverage today as well.

Finally, student loans are one type of household debt that continues to grow. Oregon has a larger share of student loans than the typical state, however this is likely due to our migration trends. Oregon is a top destination for young college graduates.

As our office detailed a few years ago, the biggest issue with student loans is not the college graduates with six figure debts. Now, those are problems, don’t get me wrong. However such individuals do tend to get good-paying jobs and are able to service the debt. Default rates are actually lower for those with large loans.

No, the biggest student loan issues are those who do not graduate or who graduate from a program that does not actually provide skills valued by employers. Such individuals generally have relatively low levels of debt, ranging from a couple thousand dollars up to maybe $10,000 or $20,000. The issue is such individuals are not able to land a job that can allow them to pay off these loans.

To help drive home this point, I think a visual can help. Taking student loan data from 2015, the folks at MappingStudentDebt.org did just that: they mapped student loan debts. Below you can see the inverse relationship between average student loan balances and delinquency rates across the Willamette Valley. Zip codes with high loan balances have low delinquency rates and zip codes with low loan balances have high delinquency rates.

For more great research on student loans, please see this recent slide deck from the NY Fed. The student loan work starts on slide 16 and runs through the end. Lots of really good information included there, I highly recommend it.

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Posted by: Josh Lehner | June 30, 2017

More on Migration and Household Incomes (Graphs of the Week)

The impact, or at least perceived impact, of migration on the local economy, household incomes and the housing market generates a lot of interest and conversation. Quite a few of you reached out yesterday to share your thoughts and I appreciate it! Given the feedback and questions, which are similar to the discussion our office has when we give presentations around the state, I wanted to dig into the data and post a quick graphical update to yesterday’s post for this edition of the Graph(s) of the Week.

What I did was look at the 2015 American Community Survey (ACS) data for young households in the Portland metro area. I focus on those not currently enrolled in school and living on their own. These are household income figures, not per person, so any differences in the composition of households can influence the data. Also, household characteristics like age and educational attainment are based on the characteristics of the householder (formerly head of household). While imperfect, this is the best I can do in short order. Given the findings yesterday and below, I am hard-pressed to believe a more granular analysis would yield wildly different results.

Among both college graduates (first chart below) and non-college graduates (second chart), there are minimal differences in household income levels for current residents, current Oregon-born residents, and out-of-state migrants. This holds true when focusing just on homeowners, or just on renters. Within each segment shown below, the median household income figures are very similar, with only a few thousand dollars in differences at most. Given the sample sizes, some of which are very very small, such differences are unlikely to be statistically significant. Furthermore, in results not shown here due to sample size concerns, income levels from [insert state here] are also not considerably different than the results shown below.

Yesterday’s post, today’s update, and additional work our office has done all point towards migration not being a major factor when it comes to the shifting household incomes in Oregon. Again, not that it’s not one factor. It’s just not the major one. The overall economy is the biggest driver of these trends. Now, as mentioned yesterday, migration is for the young, and young college graduates in particular. Such individuals and households tend to have higher income/career trajectories given job opportunities and associated wages. As such, even as migration itself does not impact the household income distribution in the short-term, it may, and likely does, have a longer-run positive impact. Furthermore, these results are for the metro area as a whole. It is likely that different neighborhoods are experiencing considerably different trends and outcomes. While that is undoubtedly true, it does not mean such neighborhoods are representative of overall trends.

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Posted by: Josh Lehner | June 29, 2017

Incomes, Migration and Housing Affordability

When it comes to the Oregon economy and rising housing costs, one key dynamic seen in the data is the fact that the number of higher-income households are showing the strongest growth. Last year we dove deeper into these changes and we regularly use a chart like the one below in our presentations.

While it may look like a fairly simple chart, and it is, there’s really a lot going on here below the surface. One of the major misconceptions regarding the chart is that these changes are due to migration. Well, migration is one part of it, but not the major driver. Other factors like demographics, headship rates, household formation patterns more broadly, and the like all matter. However, the economy appears to be the biggest factor. The number of people with a job, the type of job, and wage growth all matter quite a bit. So it’s really a complex set of circumstances driving this very clear pattern at the topline.

In presentations I tell the story of how I have been in 4 of these different bars over this time period. First I had an entry level research job, then I went back to graduate school and earned even less. Then I got a junior position here at the state, and earned a promotion. Furthermore I got married in there too, so while I have jumped around across the different bars, I actually represent a net decrease of one household due to marriage. You know, the whole two (households) become one (household) situation, if you will.

OK, back to the migration misconception issue. There is a very simple reason why the overall household trends aren’t due to rich migrants moving to Oregon and plundering our quality of life. Or something like that. The reason is that the majority of newly arrived households actually have lower incomes than the households already living in Oregon. As such, it can’t mathematically work out that migration trends are driving the growth in high-income households.

Now, it does not mean there are no rich households moving to Oregon; there are some. But overall, the biggest reason for these patterns if the fact that migration is for the young. Migration rates peak in the college-age years and decline thereafter. This pattern is why our office continually talks about the importance of the root-setting years. Once a regional economy has attracted young, working-age households, they don’t tend to leave and you have them for their prime working-age years. This is the key behind Oregon’s labor force growth over time.

And if migration is for the young, it also means it is largely for the lower- and moderate-income households as well. Younger individuals and households, even those with a job, generally earn less money because they are still early in their careers. This is true even as young migrants have higher levels of educational attainment. And this is true among young California and Washington transplants as well.

Furthermore, when looking at migrant income trends, these relative patterns hold even for households in their 40s and 50s, see the light blue line in the second chart above. Specifically, among those 35 to 54 years old — ages when very few are just finishing school and beginning their career — newly arrived households do not have significantly higher incomes than the existing population. Another indication that migration is not the key driver behind the household changes by income level.

Bottom Line: Despite some rhetoric out there, migration to Oregon is not just for the rich. In fact, migration by itself lowers Oregon incomes in the short-run given migrants tend to be younger and less likely to be employed. Over the long-run, the ability for our regional economy to attract and retain young, working-age households is vital for our growth prospects. Specifically regarding housing affordability, yes, migration does add to demand, but the biggest issue in recent years has been the lack of supply and the reasons why.

Note: I have an entire research project focusing on the shifting nature of households by income level, specifically those in the lower income brackets. Given we’re now a few months out from 2016 ACS data being released, the project is on hold until then. I will update the data and release the report at that time.

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Posted by: Josh Lehner | June 21, 2017

Kids in the Basement, 2017 Update

Yesterday we looked at household formation in Oregon. Historically one key component has been young Oregonians leaving the nest after finishing school and/or finding a job. However, in the aftermath of the Great Recession we saw a larger share of young adults, both locally and across the country, living at home. Of course this was for logical reasons. Employment opportunities barely existed and a larger share returned to school in hopes of increasing their skills for better earning potential in the future.

However as the recession turned into recovery, which turned into expansion, the expectation was for these young Oregonians to begin to move out on their own. Nearly 3 years ago at their annual forecast breakfast I told the home builders that we had reached Peak Kids in the Basement. Well, I was wrong. We have not seen the share of young Oregonians living at home decline. At all.

What we have seen, however, is a shift in employment for those living at home. Previously the increase had been entirely among those without a job. The vast majority of that increase was due to larger enrollments in higher education, both full-time and part-time. In recent years we have seen a cyclical decline in non-employed young Oregonians living at home, but a corresponding increase in those with a job. So the economic conditions changed as expected, however the behavior did not. One key suspect as to why may be housing costs. High rents today may be a major hurdle to forming one’s own household or trekking out on one’s own, even with roommates. Additionally, given high rents, a young household has trouble saving money toward a down payment on a house. As such, living at home even while employed, allows for greater savings and financial flexibility. That said, I don’t have a full explanation for these trends.

Furthermore we have yet to see any rebound, cyclical or otherwise, when it comes to idle youth or boomerang college graduates. Keep in mind these subgroups are based on a very limited sample, so reading too much into them may be a fool’s errand.

One thing we do know is that some major life events, or milestones to adulthood, are shifting later into life over the past couple of generations. No, this isn’t a Millennial story per se. Rather, they are just the continuation of these trends.

Back in April, the Census Bureau released an interesting report called “The Changing Economics and Demographics of Young Adulthood: 1975–2016.” (HT: Tim Duy) The report goes through a lot of the data and trends among young adults. What I was struck by were three things in particular. First, when it comes to leaving the nest the report says:

local labor and housing markets shape the ability of young people to find good jobs and affordable housing, which in turn affects whether and when they form their own households. Apart from local markets, patterns in migration may help create geographic differences in young adult living arrangements.

 

When looking across states, the report finds Oregon’s share of young adults living at home is the 11th lowest in the nation. Now, the increase from before the Great Recession to today has been the same, we just have a lower rate overall. I suspect much of that is due to our strong in-migration flows. It is hard to move to a different state and still live at home, obviously.

Second, Census compares what age most people say is the right time to complete these various milestones to adulthood and what share of the population actually does so by that age. See the two farthest right columns in the table below. For example, the ideal age for completing school and finding a full-time job is 22 years old. However only about one-half and one-third of young adults have actually done that by age 22.

Third, there has been an increase in so-called idle youth among the older Millennials living at home (25-34 years old). Census reports about 1 in 4 of this group are neither working nor enrolled in school. The report goes on to say that such individuals are more likely to have lower levels of educational attainment, which makes economic sense. However, Census also notes such individuals are also more likely to be disabled, and/or have a child. Either of which does make it harder to find work, and live on one’s own. Not all of the increase in young Americans living at home can be attributed to the economy. Some is due to life circumstances, evolving behavior and the like.

In conclusion, the share of young Oregonians living at home has not changed in recent years. Given that a larger share of those living at home now have a job, I do suspect there will be some cyclical decline moving forward as the economic expansion continues. Rising incomes and slower rent increases are also supportive of stronger household formation and stepping out on one’s own. However, at some point the proof is in the pudding. We’re clearly not there yet.

Note: While I was wrong in my 2014 housing prediction — and I felt confident in it — I was right in my 2015 housing prediction (Peak Renter), which I was much less confident in. There was no real 2016 housing prediction unless we can count the Housing Inflection Point.

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Posted by: Josh Lehner | June 20, 2017

Oregon Household Formation and Housing Outlook

Household formation, or the number of new households each year, is a key economic indicator. It represents more people finding jobs, stepping out on their own and the like. It can also be thought of as a gauge of economic confidence or security. Most people do not trek out on their own — renting an apartment or buying a home — unless they feel reasonably secure in their ability to make rent or pay the mortgage.

The Great Recession effectively stopped household formation in its tracks. Jobs were scare and household incomes declined. More individuals and families doubled up in apartments, fewer Oregonians got married and the birth rate fell even further. However, as the Oregon economy transitioned from recovery to full-throttle growth a couple years ago, so too did household formation. The number of new households formed across Oregon in recent years is the largest in more than 20 years. The combination of more people with a job, rising household incomes, and the return of migration flows is driving new household formation here in Oregon.

Note: The chart below shows the number of households in Oregon from both the monthly Current Population Survey which has a small sample size and, where possible, the decennial Census and American Community Survey, which have much larger sample sizes. In recent years the CPS shows more households than the ACS and the gap is growing somewhat. As such, take the latest CPS readings with a grain of salt as they may overstate the household growth to some degree. However, we do know population growth, as reported by both Portland State and Census, has accelerated in recent years. Household formation has too, the question is to what degree given the differences in the available data.

Overall this is great news for the Oregon economy, and the housing market in particular. Or at least it has been historically. A growing economy and population leads to more households, driving demand for housing units and household furnishings which leads to more new construction. More new construction leads to more jobs and wages, and a reinforcing virtuous cycle ensures. However, new construction hasn’t kept pace this cycle. In recent years, household formation in Oregon is around 30,000 per year but housing starts are totaling just under 20,000 units per year.

Now, a temporary mismatch between supply and demand is to be expected. Demand can change overnight, and certainly does with the business cycle, however supply cannot. It takes time for builders to find a property, get financing, get permits, and build. However the supply side of the market usually does get going and tends to overbuild somewhat (at times a lot). The fact that we haven’t quite reached this stage of the housing market yet is what has many economists worried. Lack of supply and the reasons why, are the fundamental drivers of the tight housing market today. That said, there is a case to be made that multifamily construction in Portland’s urban core is now sufficient to hold down rents, even as total construction remains at low levels relative to population growth and household formation. The same cannot be said for other parts of the state just yet.

In terms of the outlook, our office expects some moderation for the tight housing market in the coming years for at least three reasons. First, new construction will continue to increase. Vacancies are low, prices are rising and so too is demand (household formation). Market conditions continue to be supportive of new construction. That said, we do not have robust housing start growth built in. However, another couple years of solid gains is to be expected.

Second, population growth, and therefore household formation, will slow. There is a clear statistical relationship that population growth follows trends in employment. The full-throttle economic growth here in Oregon a couple years ago meant that population growth ramped up as individuals and families moved in search of those more-plentiful job opportunities and our high quality of life (see the Housing Trilemma for more). Now that the economy is slowing, transitioning down to a more sustainable rate, so too will migration flows. In fact, according to our friends at ODOT, the number of surrendered driver licenses at the DMV has already peaked, which traditionally has been a very good leading indicator for population growth.

Third, when it comes to the housing market and affordability, household income gains are beginning to make a difference. Income growth for those in the middle and bottom part of the income distribution is picking up. While affordability has yet to improve, it has stopped getting worse for many Oregonians.

Continued increases in new construction, coupled with slowing population gains and rising incomes are the ingredients for improving housing affordability in the coming years. We are not there yet, but between now and the next recession, that is what our office’s baseline outlook contains.

Stay tuned, later this week I will have an update on Kids in the Basement, or the share of young Oregonians living at home. 

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Posted by: Josh Lehner | June 16, 2017

Willamette Valley Household Incomes (Graph of the Week)

This edition of the Graph of the Week highlights improving household incomes here in the Willamette Valley. While it was included in the Salem outlook slide deck posted the other day, it deserves to be pulled out. As we have discussed numerous times lately, the tight labor market has begun driving many positive economic trends. The share of the working-age population with a job today is back to where it was last decade. Wages are rising across all industries and across all regions of the state. This combination — more people with jobs, and wage gains — is driving household income gains for those in the middle and bottom part of the income distribution. These households only have wages and the safety net in terms of income and purchasing power. They are fully reliant upon a strong economy to generate any sort of gains. The economy is now fully into this phase of the business cycle where such gains are finally being realized. Furthermore, income growth is and will help with housing affordability too.

Note: the reason I am using 2 year moving averages here is due to the noise or volatility in some of this data, as reported by the Census. This is particularly the case for Corvallis, and a little bit with Salem. Mathematically it works out, of course. However, in terms of the eyeball test, the average looks to undersell the improvements in the Albany MSA (Linn County). Albany has seen growth in its median household income from the worst of the recession.

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Posted by: Josh Lehner | June 14, 2017

Salem’s Economic and Housing Outlook (Slides)

Salem’s economy is booming and has great forward-looking demographics. Job growth in recent years is across all industries and is the strongest the region has seen in 25 years. However, like the rest of the state and much of the nation, housing affordability is a big concern. I have given a couple local presentations in recent months, and will be focusing on housing today at a SEDCOR Economic Business Forum lunch. Below I have combined our office’s Salem-specific work with a few of the most important statewide economic trends. These slides focus on many of the same topics and issues we regularly discuss in our forecast documents and here on the blog, however with a local twist for those interested.

 

Previously I posted slides from a Corvallis and Albany presentation I did last year. In the near future I will share recent work I have done for Bend and Eugene as well. It should also be noted that our office’s regional work is best thought of as a complement to the regional work done on a daily basis by our friends at the Oregon Employment Department. Here in the mid-valley, see the articles and presentations that regional employment economist Pat O’Connor had done recently, along with the local workforce analyst Will Summers.

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Posted by: Josh Lehner | June 7, 2017

Oregon Recreational Marijuana Forecast

SB 845, among other things, would give our office the recreational marijuana forecast responsibility. While not current law yet, we went ahead and produced such a forecast for the first time in our most recent quarterly forecast. What follows below the fold is an extended summary of our forecast work, including lots of pictures, I mean charts, for those interested.

Keep reading for more on the recreational marijuana outlook

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Posted by: Josh Lehner | May 31, 2017

About that #1 Revenue Growth…

You’ve seen it, I’ve seen it, we’ve all seen it. Oregon leads the nation in revenue growth. It sounds reasonable doesn’t it? Oregon’s economy is more volatile overall and generally outperforms the typical state. In recent years we’ve been Top 10 for employment, personal income, and state GDP growth, so naturally revenues would follow suit. Well, not so fast. The broad point that Oregon revenues are doing better than most states is true, but the magnitude of the changes and the exact state ranking is incorrect.

Let’s start with the Pew “analysis” that is the source of the maps and charts comparing state revenue growth. Hmm. The Oregon data just looks … off. The type of jump seen in 2015 — nearly 30% overnight — just doesn’t happen. Possibly something like oil-related revenues in Alaska or Texas may, but we know Oregon’s General and Lottery Funds didn’t increase that much. So what happened?

Well, if you look at the underlying data published by Census you see the same thing. Pew just copies and pastes the data from Census and does an inflation adjustment. It turns out the jump is caused by a massive increase in Occupation and Businesses License Taxes, or code T28. In speaking with the folks at the Census Bureau this includes: tire disposal, hazardous waste, petroleum load, and dry cleaners fees. How on earth could those increase overnight to become Oregon’s second largest revenue source, trailing only personal income taxes? Well, they can’t. And they didn’t. Turns out there is a coding error and the data is incorrect.

I know it’s not as sexy as being number one, but it looks like Oregon should probably be number nine. If you strip out the T28 revenues — Census is working on revising the data and will do so in the relatively near future — and compare Oregon’s trends you get the adjusted graph below. There is no question that Oregon’s revenues have seen better growth overall than the typical state because our underlying economic growth has been better. We just haven’t done an order of magnitude better than the typical state. This modified ranking places us a little behind California and a little ahead of Washington, which sounds just about right.

Additional Notes:

– The Census Bureau tries their best to pull all this information together. It is a very hard task to do and issues arise. Our office knows because we act as at least part of the clearing house for the Oregon data. It comes from many different places and sources. Our office has had issues trying to get this together and out the door. We have made mistakes and also not been able to complete all the line items in a timely manner in the past. We are trying to figure out a better process to ensure more complete and more timely reporting to Census. So our hands here aren’t entirely clean either.

– In talking with Census and our counterparts in other states, it is clear that every state has some idiosyncratic events that impact their revenue flows. It makes it hard to do some of the work that folks like Pew are trying to do for this reason. You really need to try and understand local issues (tax structures, base calculations, exemptions, etc) to understand these bigger trends. Employment and income comparisons are easy. State and local taxes are not. For example, as I noted in the last chart above, Oregon’s kicker payouts cause large year-to-year changes that aren’t indicative of the underlying economy or broader revenue trends.

– All of this said, the jump in the 2015 Oregon data should have set off some data analyst’s Spidey sense. For folks like Pew, trying to upgrade their state comparison work, something like that would be a natural place to dig into the data to understand what is happening. Figuring out why different states are seeing better or worse growth would add tremendous value. They’re just not doing it now, nor did they previously when looking at state revenue forecasting.

– Lastly, there are two general statements about state revenues making the rounds. The first talks about changes from before the Great Recession through today. This is the correct way to look at the situation. The second one compares revenue growth from the depths of the crisis through today, measuring growth just in the expansion to date. This is neither a good nor useful way to measure revenue growth. Some states and some revenue streams are more volatile. Only measuring changes over part of the cycle simply muddies the water and does not lend itself to being helpful.

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